Picking up estimate-beating stocks is any investor’s dream. After all, this is the time when investors get to know which stock to settle on and which ones to walk out on, based on a company’s earnings scorecard.

While appraising earnings performance, there are various factors investors normally take a look at. But among them, earnings beat seems to be the most intriguing driver of stock movement other than factors like earnings growth or acceleration.

Inside Earnings Beat

Investors normally look to position themselves ahead of time and hunt for stocks that are likely to spring up an astounding performance. After much brainstorming, Wall Street analysts project earnings of companies. These estimates act as investment leads.

A positive earnings surprise or earnings beat is typically the case when actual or reported earnings come in above the consensus estimate. Historically, if a company’s earnings manage to beat market expectations, its stock surges post release.

What Makes Earnings Beat Superior to Earnings Growth

A 20% earnings rise (though apparently looks good) doesn’t tell you everything about the company’s performance. This might represent a decelerating earnings growth momentum over the years or quarters, raising questions over the company’s fundamentals.

Also, seasonal fluctuations come into the play. If a company’s Q1 is seasonally weak and Q4 is strong, then it is likely to report a sequential earnings decline. In such cases, growth rates are misleading while judging the true health of a company.

On the other hand, analysts combine their understanding and a company’s guidance when formulating an earnings estimate. Thus, outperforming that estimate is almost equivalent to beating the company’s own expectation as well as market perception. Of course, this gives you a clear picture of the company’s bottom line.

How to Find Those Star Performers?

Now, since it is tough to foresee if a company will beat or miss in the upcoming earnings release, investors can review the earnings surprise history. An impressive track in this regard generally acts as a catalyst in sending a stock higher. It indicates the company’s ability to surpass estimates. And investors generally believe that the company will have the same trick up its sleeve or in other words is smart enough to beat on earnings next time.

For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/509054/looking-to-make-the-most-of-earnings-beat-5-top-picks

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